Chapter 18 The Markets for the Factors of Production 11 25 2010 Factors of production the inputs used to produce goods and services o Labor land and capital are the 3 most import factors of production The demand for a factor of production is a derived demand o A firm s demand for a factor of production is derived from its decision to supply a good in another market o Ex The demand for computer programmers is inseparably linked to the supply of computer software and the demand for gas stations attendants is inseparably linked to the supply of gasoline The Demand for Labor Labor markets are governed by the forces of supply and demand o Ex The supply and demand for apples determine the price of the apples and the supply and demand for apple pickers determine the price or wage of apple pickers Most labor services rather than being final goods ready to be enjoyed by consumers are inputs into the production of other goods The Competitive Profit Maximizing Firm o Ex Apple producer o How they decide the quantity of labor to demand firm owns apple orchard and each week must decide how many apple pickers to hire to harvest crop After firm makes hiring decision workers pick as many apples as possible Then firm sells apples pays workers and keep leftovers as profit o 2 assumptions about firm firm is competitive in market for apples seller and market for apple pickers buyer Price taker for price of apples and wages of workers Firm is profit maximizing firm does not directly care about number for workers it has or number of apples it produces Only cares about profit revenue total cost The Production Function and the Marginal Product of Labor o To make hiring decision firm must consider how the size of workforce affects amount of output produced o Production function relationship between quantity of inputs used to make a good and the quantity of output of that good o Marginal product of labor increase in amount of output from an additional unit of labor o Diminishing marginal product property whereby the marginal product of an input declines as the quantity of the input o As more and more workers are hired each additional worker contributes less to the production of apples For this reason the production function becomes flatter as number of workers increases rises The Value of the Marginal Product and the Demand for Labor o To find workers contribution to revenue convert marginal product of labor into the value of the marginal product measured in dollars o Value of the marginal product the marginal product of an input times the price of the output o A competitive profit maximizing firm hires workers up to the point where he value of the marginal product of labor equals the wage o The value of marginal product curve is the labor demand curve for a competitive profit maximizing firm What Causes the Labor Demand Curve to Shift o The output price When output price changes value of marginal product changes and the labor demand curve shifts Ex An increase in the prices of apples raises the value of the marginal product of each worker who picks the apples and therefore increases labor demand from the firms that supply apples A decrease in price of apples reduces value of marginal product and decreases labor demand o Technological Change Ex Invention of a cheap industrial robot could conceivably reduce marginal product of labor shifting labor demand curve to the left o Supply of other factors Ex Fall in supply of ladders will reduce marginal product of apple pickers and thus the demand for apple pickers The Supply of Labor The Trade off between Work and Leisure o Trade off between labor and leisure lies behind the labor o Labor supply cure reflects how workers decisions about the labor leisure trade off respond to a change in that opportunity supply curve cost o Upward sloping labor curve means that an increase in the wage induces workers to increase the quantity of labor they supply Because time is limited more hours of work mean that workers are enjoying less leisure Workers respond to increase in opportunity cost of leisure by taking less of it What Causes the Labor Supply Curve to Shift o Change in tastes In 1950 34 of women were employed and in 2000 64 were o Changes in alternative opportunities Supply of labor in any one labor market depends on the opportunities available in other labor markets If wage earned by pear pickers suddenly rises some apple pickers may choose to switch occupations and supply of labor in market for apple pickers falls o Immigration Movement of workers from region to region is an important source of shifts in labor supply When immigrants come to U S supply of labor in U S increases and supply of labor in the immigrants Equilibrium in the Labor Market countries falls Any event that changes the supply or demand for labor must change the equilibrium wage and the value of the marginal product by the same amount because these must always be equal Shifts in Labor Supply o When labor supply increases the equilibrium wage falls and employment rises The change in wage reflects a change in the value of the marginal product of labor with more workers the added output from an extra worker is smaller Shifts in Labor Demand o Suppose that increase in popularity of apples causes price to rise Price increase does not change marginal product of labor for any given number of workers but does raise value of marginal product With higher price of apples hiring more apple pickers is more profitable o When labor demand increases equilibrium wage rises and employment rises The change in wage reflects change in value of marginal product of labor With high output price added output from an extra worker is more valuable The Other Factors of Production Land and Capital Capital equipment and structures used to produce goods and services Equilibrium in the Markets for Land and Capital o Purchase price of land or capital is the price a person pays to own that factor of production indefinitely o Rental price is the price a person pays to use that factor for a o The demand for land and capital is determined just like the limited period of time demand for labor o For both land and capital the firm increases the quantity hired until the value of the factor s marginal product equals o The demand curve for each factor reflects the marginal the factor s price productivity of that factor o Labor land and capital each earn the value of their marginal contribution to the production process
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